Monday, May 27, I made sure to thank those family members who served in the armed forces. Then I dug in and did some preparation for the next market day.
I had an appointment the next morning that would mean that I would be away from my office much of the morning. Some of that time, I would be unable to monitor my trade.
My Open Trade as of the Previous Friday's Close:
This trade started out as a butterfly. The unrelenting move to the upside since its inception had forced me to roll my butterflies higher and higher, which I had done in half-size batches at a time. The expiration chart above represented a position with butterflies at 960 and 980 strikes along with some call debit spreads, resulting in the current expiration shape of the trade. Rolling the butterflies had forced me to realize some losses (I got less for the old flies I was selling than I paid for the new ones I was buying as I rolled up, etc.). Therefore, the trade was then showing a manageable loss. Still, the trade was in pretty good shape. I like to keep my deltas at about +/- 5 deltas/butterfly contract, and this was originally a 10-contract position, so the deltas were okay. Normally, I adjust once a day, in the last ninety minutes of the trading day, and I try to adhere to that except in unusual market conditions.
That Monday, May 27, most of us were uneasily aware, however, that one global market, the Nikkei 225, had been experiencing anything but normal market conditions. Aware of the debacle happening on the Nikkei 225 as the previous week had ended, I had begun adjustments that lowered the risk, taking my maximum risk from near $40,487.98 down to $27,217.48. I did this by reducing the number of butterflies, which then allowed me to reduce the amount tied up in hedges against an upside move.
Nikkei 225 from Thursday, May 23 to Monday, May 27, Chart from Yahoo Finance:
This chart represents a plunge from Thursday, May 23rd's 15,926.25 intraday high to Monday, May 27th's 14,142.65 close. Yikes!
What did I do to prepare for my time away from the markets? First, I looked at a price chart. At what point could RUT traders abandon ship to the downside, or initiate a rabid relief run higher? I set alerts just inside those points, with the alerts to be sent to my phone. I wanted to know if the RUT got past 970 on the downside or 999 on the upside.
I studied the analysis graph, the graph of my position. What would the delta values be if those levels were hit? I determined that if the RUT moved much below 970, I would need to sell at least one of the two call debit spreads I use to hedge against an upside move in order to even out my delta risk. I determined that I would need to buy another call debit spread if the RUT got too much past 999. Setting the alerts at those two levels would enable me to place the order on my mobile platform with my smart phone. Just in case that proved problematic--if I forgot my phone, the app didn't work, or some other unforeseen occurrence presented itself--I printed up my chart of my position, marked my planned adjustment levels and wrote down the telephone number of my brokerage's trading desk. My mobile platform does not include an analysis page, so having that position chart to view could prove helpful. I also have a netbook where I can view all that information, but my brokerage's platform has grown to be such a memory hog that the mobile app on the smart phone is faster.
Remember, though, that part of the time I would not be available to check messages or call my brokerage's desk. For that reason, I set two conditional orders, with wait conditions before the orders were triggered. Due to the sizing requirements needed for publication, some of the information was not readily viewable, but you can determine that the Status space reads "Wait Conditions."
Details of the Wait Conditions on Order to Sell a Vertical:
This particular order would be triggered if the RUT dropped below the threshold I set for the order at 967. The order would then be submitted to sell the spread at eight cents below the mid. In my experience, in all but the most rabid markets, that's enough to get the order filled. Setting a limit order, especially one tied to the mark or mid-price between the bid and ask, risks not getting the order filled at all. Setting any kind of spread order risks not getting it filled in fast-moving markets. However, in all but the most rabid market conditions, this would typically fill. I didn't want a market order for a spread. Not all brokerages allow this much flexibility with setting orders, but I was usually able to find an admittedly clunkier but workable solution when I traded through a less flexible brokerage. Sometimes, I had no choice but to leave a market order.
The idea is that I wouldn't let this order or the other one trigger but instead would be notified first by the alerts I had set that conditions were about to be met to trigger them. I could then go in and cancel these orders and work one manually. In normal market conditions, I wouldn't even be considering an adjustment in the morning, outside my usual adjustment period. That's why I keep my risk as smooth as possible, so that I don't have to do that and can wait until closer to the end of the trading day and market sure that the morning's move isn't quickly reversed. With the Nikkei's example haunting us all as this trading week began, however, I especially didn't want to risk markets cascading lower without being able to make at least this incremental adjustment to begin the process of evening out the delta-related risk again. Perhaps I needed a sense of control before I left for the appointment, too, and these adjustments were, after all, conservative ones.
This might not be the best idea, but it was one that allowed me to sleep that Monday night. To summarize, what did I do? When I saw what was happening on other global bourses and knew I was going to have to be away from my office the first trading day of the next week, I began reducing the risk in my trade. I made sure that the position was in as good a shape--delta and position within the tent--as I could make it. I made sure I had a plan for the time I was away and the telephone number of the trading desk. When you're rattled, it's sometimes difficult to remember what you planned to do or find needed telephone numbers. I didn't want to adjust outside my normal adjustment time unless I feared a blow-out move either direction, so I set alerts at the points just before I thought that might happen, so I would know to watch if I could. Then I set conditional conservative orders to trigger in case I could not take action after the alerts sounded.
I did not set up arrays of orders to trigger one after the other, as I might have done. I wasn't planning for Armageddon, but I did have an extra put in place in case Armageddon happened. I was just planning for an outsized but not Flash-Crash type move during the portion of the morning when I could not be attentive to the markets. The upside order did trigger that morning while I was unable to access my account. When I could access it again, that conservative adjustment allowed for a calm drive home. Later in the day, at my normal adjustment period, I bought one more call debit spread and my trading day was done.
Think ahead to plan how you'll manage times when you can't watch the markets. How can you reduce risk in the trade? Should you take steps to reduce overall risk by closing part of the position, sizing it down? Should you use debit spreads to minimize risk? Will alerts allow you time to call up a screen and work an appropriate trade? Are conditional orders needed, typically a last resort?